My latest book, Predict the Next Bull or Bear Market and Win (Adams Media), is available at any Barnes & Noble store, and on Amazon right now. Here is a link to the book and sample pages: http://amzn.to/1h1rZZu

Analysis: Many sentiment indicators are reaching the tipping point, especially Investors Intelligence, which is a survey of financial writers. In addition, the VIX is near a six-year low, which reflects overwhelming complacency among option buyers. The VIX tells us that option traders are not expecting surprises. So far, they’ve been right (but as a contrary indicator, it’s a warning sign). In addition, RSI is near overbought levels. In other words, sentiment is on the frothy side. However, moving averages are telling us the market is still in an uptrend. If you’re a bull, the chart is your best friend right now. Unfortunately, the higher we go and the frothier it gets, the market will eventually top out and reverse. Bottom line: The market is giving hope to the bulls and the bears, but so far, the bulls are winning.

Opinion: I’ve been in contact with a number of experienced, independent traders who are astounded at their proprietary technical indicators. It’s as if the market is on another planet, and for many old-timers, it’s a huge red flag. A lot of things aren’t making sense. First, bonds are rallying along with stocks, which shocked many fixed income traders. (Bonds were supposed to get crushed). Volume in the stock market was so low last week it seemed no one was participating, and yet, the market went up. That’s a red flag. The fear that money managers have of missing out on the next rally is another red flag. When too many people are in a buying panic, afraid to miss out, it usually doesn’t end well.

It’s true that the bulls have had their way for five years with a little help from their friends (the Fed). Most bears are laying low, biding their time and managing risk. Although this market is not going to end well, to manage risk, you must not short at the top. After all, the market can still go higher from here. In my opinion, the risk is so extreme right now that cash is the only prudent move to make. Obviously, many disagree with me (a large majority of investors are bullish). Buying inverse ETFs is also an effective strategy but only for experienced traders who are willing to take some short term pain (and cut losses if market goes against them).

Right now, this market is frustrating to both bulls and bears. The bulls are not getting the returns they have come to expect (10 percent or more), while the bears are losing money. If I’m right about the market (that it’s reaching a breaking point), here’s what you are looking for: Wait for a large down day in the S&P 500 that doesn’t immedately reverse. In other words, you might get a two-day selloff that isn’t extreme, but does make everyone take notice. If that occurs, that would be a signal that more pain is coming.

Sitting and waiting for an inflection (or pivot) point takes tremendous discipline, especially if you are bearish. If you’re bullish, however, try not to get trapped on the wrong side of this market. Perception can change quickly, and Wall Street is filled with the stories of those who could not get out of the market in time. If I’m right, snapping time is coming, but it could take a few weeks or months (or a year although I highly doubt that). As always, look at the market for clues. One thing is for sure: the lack of volatility and volume is a red flag, and the more red flags, the more dangerous the market becomes.

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

My latest book, Predict the Next Bull or Bear Market and Win (Adams Media), is available at any Barnes & Noble store, and on Amazon right now. Here is a link to the book and sample pages: http://amzn.to/1h1rZZu

Analysis: Financial writers are so bullish about the market it’s near the danger zone. The VIX may drop below 11 this week, an extreme level that indicates few option traders believe this market isrisky. Many retail investors are unsure what to think, which is reflected in the AAII survey results (overwhelmingly neutral). Technical indicators are telling us the S&P is still in an uptrend but moving at a turtle’s pace. Bottom line: This is a market that slowly moves higher, defying logic. If you want to survive the next year, logic is what you’ll need.

Opinion: This remains a dangerous market for many of the reasons that I have discussed in previous MarketWatch columns and blogs. Many people are willing to ignore reality and keep buying as the market tops out. The reason this market is so dangerous is that it has caused investors to forget the lessons of the past (2000 and 2007), red flags (i.e sky high margin rates), and reality (bull markets don’t last forever). The longer this slow-moving market moves higher, the crazier it will get.

Here is what I know: This is a dangerous market that must end one day. One day there will be a catalyst that will send the markets much, much lower (and back to reality), but no one can predict what that catalyst will be. Even more annoying, no one knows when that catalyst will occur. More than likely, the retail investor will once again be the last to get out.

How do you protect yourself? It will take extreme patience to manage this market, more patience than most investors have. You already know that I am not long this market at all. I am more than willing to give up 5 to 7 percent potential upside to avoid a 20 percent or more downside. That’s my opinion, but many people are all in the market because they don’t want to miss out on future rallies. Right now, the stock market is the only game in town if you want to make big money (which is another red flag). Only you can decide how much risk you are willing to take, and it’s not an easy decision. Sitting and waiting on the sidelines is not a comfortable position, which is why so many investors are going to lose money in the future. (Hint: Aggressive traders may want to initiate hedged short positions).

I know how the stock market story is going to end (very badly), but it could be a medium to long wait (depending on geopolitical and economic conditions, or rising interest rates). Until then, I will be patient. My main goal is minimizing risk while preparing for the debacle that is destined to occur.

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

My latest book, Predict the Next Bull or Bear Market and Win (Adams Media), is available at any Barnes & Noble store, and on Amazon right now. Here is a link to the book and sample pages: http://amzn.to/1h1rZZu

Analysis: Investor sentiment hasn’t changed much from last week. Investors say they are neutral but margin rates are at all-time highs, which is a negative signal. Financial writers and a majority ofmoney managers are still extremely bullish, so it will take a correction to change their minds. VIX is still showing that option speculators are complacent, not fearful. Technical indicators are giving mixed signals, although the Nasdaq and Russell 2000 are in a downtrend. Bullish investors are hoping the Dow and S&P will lift these indexes rather than visa versa. Only time will tell who is right. The most interesting development lately is the rally in bonds, which has surprised nearly everyone. Keep your eye on the 10-year yield. Any extreme moves in bonds could disrupt the stock market.

Opinion: Last week, I wrote a controversial column for MarketWatch (http://on.mktw.net/1kg4b5p). In the column, I wrote there are signs a bear market is approaching, although no one can say when. I also don’t know the catalyst that will cause the current bull market to end, but I’m looking for clues. More than likely, I wrote, it will be a geopolitical crisis, an economic disruption, or a spike in interest rates.

After the column was published, I received an onslaught of negative comments and tons of emails. A few fund managers wrote to thank me for confirming what they believe, but the majority of investors attacked me for being “stupid,” “wrong,” and “insincere.” I am especially sympathetic to fund managers who are willing to be independent (those who are probably getting heat from their clients). Being a money manager in this current environment is extremely difficult. Right now, clients are pressuring managers to outperform the indexes, and will punish those who dare to move to the sidelines in cash. That in itself is a red flag.

I will never forgot what happened to Robert Rodriguez, an extremely successful fund manager who I interviewed for one of my books. In 2007, he correctly forecast the global meltdown, so he increased the cash position of his fund to 12 times that of the industry. His reward: An onslaught of redemptions and angry clients who questioned his decision. As it turned out, he was 100 percent right, but he went through hell before he was vindicated. It’s not easy being a money manager, especially when clients are getting greedy.

I was recently interviewed by MarketWatch columnist Chuck Jaffe, who said that he sometimes hears from investors who say (paraphrased): “I am willing to take risks in the stock market. I just don’t want to lose money.” Unfortunately, investors can’t have it both ways. They want their money managers to make them rich without any risk of losing money. Good luck with that!

Right now, I want to be protected from a bear market. I have no problem waiting for its arrival even if it is several months. As Jesse Livermore said, it’s rare for traders (or investors) to sit and wait for underlying market conditions to change. Eventually there is a pivot or inflection point that will signal the beginning of a bear market. That inflection point is coming, and I’m patiently waiting while looking for clues.

I thought a lot about the emails and comments I received. Some accused me of being a “permabear,” but that is not true. I am looking forward to the day when a stronger and healthier bull market emerges. The main point is you should not be a permabear or a permabull. Either is dangerous to your financial health. To succeed in the market, it’s essential you remain objective. Those who refuse to acknowledge that a bear market is even possible are just as mistaken as those who are permanently bearish.

I don’t like to see other people lose money, especially retail investors who have no clue they are at risk. Some get angry for suggesting that investors move to the sidelines in cash. It’s up to each individual to determine how much risk they are willing to take. As for me, I believe it’s prudent to have cash in a dangerous market. I’d rather miss the 5 percent (or less) upside than get hit with a 10 or 15 percent correction. That’s my opinion.

I also know that after a major correction or crash, there will be an excellent opportunity to buy stocks that have been smashed. Many will disagree with me, but I believe the market is at risk. I’m keeping my eyes on the S&P 500. When that starts to crack, then things could get ugly fast.

This is important: Knowing when to stay out of a dangerous market is only one part of the equation. Equally important are using clues, indicators and observations to know when to get back in. As you may know, after the 2008 crash, many retail investors were too afraid to step back into the market, and in fact, many are just now entering the market (one of the reasons that margin rates are so high). Therefore, although having cash is an excellent way to avoid a bear market, you don’t want to be in cash indefinitely.

Bottom line: The market has the final word, and everything else is just opinion. And that is why you and only you must decide how to handle this market. Some will buy and hold through a correction or bear market, while others will move to the sidelines. A majority, however, don’t even think there will be a bear market at all. I can’t wait to find out who’s right!

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

My latest book, Predict the Next Bull or Bear Market and Win (Adams Media), is available at any Barnes & Noble store, and on Amazon in May. Here is a link to the book and sample pages: http://amzn.to/1h1rZZu

Analysis: Once again, retail investors are saying they are neutral about the stock market, yet margin rates are at all-time highs. That is a huge red flag. On the other hand, financial writers (and many money managers) are excessively bullish, and nearing extreme levels (which is a flashing red sell signal). The VIX continues to show that option traders are complacent rather than fearful. Technical indicators are mixed, which is typical when the market is topping out. The Nasdaq is below its 50-day and 100-day moving averages, the Russell 2000 is below its 200-day moving average, and the Dow is still hanging on. Although the Dow is slowly churning higher, it is not healthy (even though it’s making record highs). Bottom line: Warning signs are everywhere. Caution is advised.

Opinion: The public is focused on the Dow so many believe that the worst is over. Although the Dow is making “all-time highs,” underneath the hood there is trouble brewing. As I write in my latest MarketWatch column (coming out later this week), it’s only a matter of time before the Dow follows the Nasdaq and Russell into a downtrend (and eventually into a bear market).

I am amazed that so many experienced investors and money managers are not seeing the flashing red warning signs. (Plug: I mention all of these signs in my latest book, Predict the Next Bull or Bear Market and Win). After six years, perhaps it’s easy to believe you’re a stock-picking genius, or that the market is bulletproof. Or perhaps they believe the Fed can prevent a bear market by inventing a cool new financial tool. The Fed can distract and delay, but it cannot prevent a bear market.

Being patient is difficult for most investors. It’s easy to hide your head in the sand and just hold stock positions. After all, the market has always come back before, and it might again. Unfortunately, the individual stocks you own might not.

I recently spoke with a former hedge manager and financial insider. This man is extremely knowledgeable about how the stock market operates. He confirmed what I have been saying for months: The market is in the danger zone and a correction or crash is inevitable. No one knows what the catalyst will be, but when it comes, it will be terrific. In his opinion, one of most revealing indicators are margin rates. Investors are borrowing money to buy stocks at higher levels than in 2008 and 2000. Not a good sign.

When the selloff in equities begins, it will be like a snowball rolling down the hill. The catalyst could be an economic event, a geopolitical crisis, or a spike in interest rates. It will cause the most knowledgeable and powerful investors to sell. Then the minions will sell, and the rest will be market history.

If you have followed this blog, I was cautiously bullish until six months ago, when the warning signs appeared. Each month, there is more evidence the market is getting more dangerous. Many investors don’t seem to recognize the signs. Perhaps they believe their fund manager will save them. Or perhaps they believe that they will be able to get out in time (like everyone else). Or maybe they think these warnings are like the boy who cried wolf.

I admit that after speaking with my knowledgeable friend, I have become even more cautious about the market. Although no one can specify when a selloff or bear market will occur, one is coming. I’m willing to remain primarily in cash for months until there is a significant sell signal. More than likely, it will start like this: One day there will be a huge selloff that comes out of nowhere. The financial commentators will struggle to explain why (and their reasons will be ridiculous). Don’t care about “why” the market is selling off on that day. The fact that it is selling off strong on high volume is significant.

I’m also going to make an educated guess that the buy-on-the-dippers will rush in to take advantage of the selloff. It’s the second wave of selling that will catch most investors off guard.

Judging by the puts I bought, it’s still too early to short (unless you want to speculate). Although some individual stocks in the Nasdaq and Russell 2000 are getting smashed, shorting is for experienced traders only. A less risky method is to slowly (and I mean slowly) buy a few shares of an inverse ETF. If the position is profitable, you can add to the position. If the position is unprofitable (8 to 10 percent), sell. Never add to an unprofitable position (with few exceptions).

Even though the Dow has made a series of record highs, fewer leading stocks are participating. In addition, volume has been anemic, another danger sign. Only you can determine whether to participate in this market or increase cash positions. If we do enter a bear market and you avoided losing money by reading this blog, I’d be delighted for you.

As I’ve said before, I’d rather give up 5 percent upside rather than risk 15 to 20 percent downside (or more). Once again, only you can decide how much risk you are willing to take. One last story: When I asked my knowledgeable friend whether he had any long stock positions, he looked at me and said, “Are you kidding?”

Bottom line: It’s not easy to sit on the sidelines in cash while other investors appear to be making money. In the near-term, the market could bounce higher. In the short to medium-term, caution is still advised.

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

My latest book, Predict the Next Bull or Bear Market and Win (Adams Media), is available at any Barnes & Noble store, and on Amazon in May. Here is a link to the book and sample pages: http://amzn.to/1h1rZZu

AAII survey (4/30/2014)

29.8% Bullish. 29.4% Bearish. 40.8% Neutral.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

Investors Intelligence (4/29/2014)

54.7% Bullish. 20.6% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

CBOE Equity Put/Call Ratio: .66

Bearish: Less than or near .50 is bearish (more call options are being bought).

Bullish: Higher than or near 1.0 is bullish (more put options are being bought)

Analysis: Sentiment indicators remain the same with financial writers feeling more bullish while retail investors are unsure (i.e. neutral). Nevertheless, that hasn’t stopped investors from loading up on equity mutual funds. The VIX reflects complacency among option buyers, with no fear in sight. Technical indicators are giving mixed signals. The S&P 500 is still in an uptrend while the Nasdaq is below its 50- and 100-day moving averages. Bonds have rallied recently, confounding conventional wisdom.

Opinion: As I predicted last week, the market rallied before the Fed minutes were released and then meandered around for the rest of the week. There was an early rally on Friday followed by a mild late day selloff. As I expected, the bulls and bears fought it out all week with no clear winner (although technically the bulls won).

It’s easy to get confused by this market. On one hand, you might see a bullish market that is slowly rising thanks to the Fed and improved economic numbers. On the other hand, many high-flying Nasdaq stocks are getting smashed along with less known equities on the S&P 500. In other words, even though the market is going higher, fewer and fewer stocks are participating. That means trouble. In addition, while the Nasdaq tech and biotech stocks started to sell off a few months ago, it is spreading to other sectors. That is also not a good sign.

One thing about bull markets: They often end before most people realize it. The only way to know is through observation, studying the clues and indicators, and probing. Up to now, the put options I bought to test the market have not been profitable. Therefore, it is still too early to short aggressively. As I’ve said repeatedly, the most prudent move is to increase cash positions. Experienced traders can test and probe the indexes or individual stocks.

Each week that goes by gives us more clues. The most revealing indicator in the world is the market itself. To confirm a bear market (or a downtrend), I’m looking for intraday reversals, late day selloffs, and more volatility. If this bull market is truly coming to an end, there will be one of two scenarios: First, there could be a severe market break that will seemingly come out of nowhere. Or second, the market could drift lower and lower like a frog being boiled alive.

What if I’m wrong? According to bullish analysts, the market is consolidating, and will explode higher soon. As for me, I continue to lean bearish. Only time will tell who is right.

Bottom line: The market remains dangerous and caution is advised. It might be too early to short, but it’s also late to go long (in my opinion). The truth is in the tape, so observe it closely. The hardest action to take right now is to sit and wait for the market to reveal its hand, but that is exactly what you need to do. Making impulsive trades in a dangerous environment will cost you money.

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

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